CASH FLOW STATEMENT
- Dr. Manisha Singh
Meaning:
Meaning:
Statement depicting change in cash position from one period to another.
It explains the reasons for inflow or outflow of cash and helps the
management to plan for immediate
future.
The cash flow statement provides information about:
cash receipts (cash inflows)
uses of cash (cash outflows)
during a period of time Inflows and outflows are reported for:
◦ Operating activities
◦ Investing activities
◦ Financing Activities
The Cash Flow Statement
The Cash Flow Statement
Cash Inflows and Outflows
Cash Inflows and Outflows
PREPARATION OF CASH FLOW STATEMENT
The change in the cash position from one period to another is computed by taking in account the Application and Sources of cash.
In other words, change in cash position
= Sources of cash – Application of cash.
There are two methods of preparing the statement of cash flows:
Indirect method: derives cash flows from accrual based statements
Direct method: derives cash flows directly for each source or use of cash
Preparing a Statement of Preparing a Statement of
Cash Flows
Cash Flows
Accrual Based Statements Cash Flow Statement
Income Statement items & Changes in
Current Assets and Current Liabilities
Operating activities:
Adjust net income for accruals and non-cash charges to get cash flows
Balance Sheet: Changes in Non-Current Assets
Investing activities:
Inflows from sale of assets and Outflows from purchases of assets
Balance Sheet: Changes in Non-Current Liabilities
and Equity
Financing activities:
Inflows and outflows from loan and equity transactions
Steps in preparing Cash Flow statement:
Preparation of adjusted P/L Account to find out cash from operation.
Comparison of current items (assets and liabilities) to find out inflow and outflow of cash.
Preparation of Cash Flow Statement.
Sources of cash
Internal sources:
Cash from operation
=
Net Profit +
Depreciation (+)
Loss on the sale of fixed assets (+)
Amortization of
intangible assets (+)
Creation of reserves (+)
Profit from sale of fixed assets (-)
External sources:
Issue of new shares
Long term loans
Purchase of plant and machinery on deferred payment
Short term
borrowings/ cash credits from banks
Sale of fixed assets,
investments etc.
Purchase of fixed assets
Payment of long term loans
Decrease in deferred payment liabilities
Loss on account of operation
Payment of tax
Payment of dividends
Decrease in unsecured loans, deposits
etc.
Computation of cash from Computation of cash from
operation operation
When all transactions are cash transaction:
Net profit as per P/L A/c will be taken as the amount of cash from operations.
When all transactions are not cash transactions:
The computation of cash from operation can be done in two stages:
1.
Computation of fund from operation
2.
Adjustments in the fund so calculated for changes in CA and CL
CASH FROM OPERATION = NET PROFIT
Adjustments for changes in CA Adjustments for changes in CA
and CL:
and CL:
1. Effect of credit sales:
If out of total sales of 30,000, credit sales is Rs. 10,000 cash flow from sales
= 20,000
Thus while computing cash from operations, it would be necessary that suitable adjustments for the outstanding debtors are also made. Like
deducting the amt. of credit sale from the net profit as debtors outstanding at the year end.
OR
Cash from operation = Net profit + debtors o/s at the beginning – debtors o/s at the end of the year
Cash from operation = Net profit + Decrease in debtors or – (increase in debtors)
2. Effect of credit purchase:
2. Effect of credit purchase:
If sale = 30,000, Purchase = 25,000 out of which credit purchase is 10000 Cash from
operation = 15,000
Adjustments in the Net profit would be made by adding the amt. of credit purchases to get the cash from operation.
Decrease in creditors from one period to another would mean decrease in cash from operation and vice versa. This is because more cash payments have been made to the creditors which results in outflow of cash.
OR
Cash from operation = Net profit + creditors at the end of the year – creditors at the
beginning
Cash from operation = Net profit + Increase in creditors OR -(Decrease in creditors)
Ex: Ex:
Sales = 50,000, debtors o/s at the beginning = Sales = 50,000, debtors o/s at the beginning = 8000, debtors o/s at the end = 15000, creditors at 8000, debtors o/s at the end = 15000, creditors at the beginning = 12000, creditors at the end = 15000, the beginning = 12000, creditors at the end = 15000, Purchases = 30000, expenses = 5000Purchases = 30000, expenses = 5000
Sol: Cash from operation Rs.
Sales 50000 Less: Purchase 30000
Expenses 5000 35000 Net Profit 15000 Add: debtors at the beginning 8000
creditors at the end 15000 23000 38000 Less: creditors at the beginning 12000
debtors at the end 15000 27000 Cash from operation 11000
3. Effect of opening and closing 3. Effect of opening and closing
stock:
stock:
The amt. of opening stock is charged to the debit side of P/L a/c. thus it reduces the profit without reducing the cash from operation.
Similarly, amt. of closing stock is put on the credit side, which increases the net profit without increasing the cash from operation.
Hence suitable adjustments to the net profit is made in the form of adding back the opening stock and deducting the closing stock to get cash from operation. Thus :
OR Cash from operation = Net profit + Decrease in stock OR -(Increase in stock)
Cash from operation = Net profit + Opening stock - closing stock
Ex: Opening stock = 5000, Purchases = 20000, Ex: Opening stock = 5000, Purchases = 20000, Sales = 35000, Expenses = 5000, Closing stock = Sales = 35000, Expenses = 5000, Closing stock = 10000
10000
Sol
:
Profit and Loss a/cParticulars Amount Particulars Amount
Opening stock 5000 Sales 35000
Purchases 20000 Closing stock 10000
Expenses 5000
Net Profit 15000
45000
45000 Cash from operation: Net profit for the year 15000
Add: Opening stock 5000
20000
Less: Closing stock 10000
Cash from operation = 10000
4.Effect of change in Outstanding expenses, Income 4.Effect of change in Outstanding expenses, Income received in advance etc.
received in advance etc.
If certain expenses are not paid (i.e., o/s) or some income is received in advance, it will result in decrease in net profit without actually decreasing the cash. This is because net profit is computed after charging to it all expenses whether paid or outstanding. Therefore cash from operation will be higher than the actual profit as per P/L account. Thus :
OR
Cash from operation = Net profit + (Expenses o/s + Income received in advance) at the end –
(Expenses o/s + income received in advance) at the beginning
Cash from operation = Net profit +Increase in (o/s expenses and income received in advance) OR – Decrease in (o/s expenses and income
received in advance)
Ex: Gross Profit = 30000, Expense paid = 10000, Ex: Gross Profit = 30000, Expense paid = 10000, Interest received = 2000
Interest received = 2000
Rs 2000 are o/s on account of expenses while Rs 500 Rs 2000 are o/s on account of expenses while Rs 500 has been received as Interest for the next year
has been received as Interest for the next year Sol: Profit and Loss account
Particulars Amount Particulars
Amount
Expenses paid 10000 Gross profit 30000
Add: o/s exp. 2000 12000 Interest received 2000
Net Profit 19500 Less: interest rece- -ived in advance 500
1500 31500
31500 Cash from operation: Net profit for the year 19500
Add: Outstanding expenses 2000
Income received in advance 500
Cash from operation 22000
5.Effect of Prepaid expenses and 5.Effect of Prepaid expenses and outstanding income:
outstanding income:
It is similar to the effect of debtors.
While computing net profit from operations, the
expenses only for accounting period are charged to P/L a/c. This means pre-paid expenses (since not
charged) do not decrease net profit for the year but actually reduces the cash from operation.
Similarly income earned during the year is credited to P/L a/c, whether received or not. Thus o/s
income increases the profit but not the cash from operation. Thus:
OR
Cash from operation = Net profit + (Prepaid
expenses + o/s income) at the beginning of the year - (Prepaid expenses + o/s income) at the end of the year
Cash from operation = Net profit + Decrease in (Prepaid expenses + o/s income) OR – Increase in (Prepaid expenses + o/s income)
Ex: Net Profit = 20000, Prepaid Expenses as on 1/1/07
= 2000, Prepaid Expenses as on 31/12/07 = 3000, O/S (accrued) income on 1/1/07 = 1000, O/S (accrued)
income on 31/12/07 = 2000. Calculate cash from operation.
Cash from operation:
Net profit
20000
Less: Prepaid expenses as on 31/12/07 3000
o/s income as on 31/12/07 2000 5000
15000
Add: Prepaid expenses as on 1/1/07 2000
o/s income as on 1/1/07 1000 3000
Cash from operation 18000
Overall effect of current assets and liabilities can be shown as:
+ Decrease in debtors
+ Decrease in stock
+ Decrease in prepaid Expenses + Decrease in accrued income + Increase in creditors
+ Increase in o/s expenses Cash from operation = Net profit
- Increase in debtors - Increase in stock
- Increase in prepaid expenses - Increase in accrued income - Decrease in creditors
- Decrease in o/s expenses
Summary of findings:
Summary of findings:
Increase in Current assets and Decrease in current liability
Decrease in cash
Decrease in Current assets and Increase in current liabilities
Increase in cash
EX: BALANCE AS ON: 31/3/06 31/3/07
STOCK 10000 12000
DEBTORS 15000 20000
CREDITORS 5000 7500
BILLS RECEIVABLE 5000 8000
O/S EXPENSES 3000 5000
BILLS PAYABLE 4000 2000
PREPAID EXPENSES 1000 500
Trading and Profit and Loss account
Particulars Amoun
t Particulars Amoun
t
To, Purchases To, Wages To, Gross profit
To, Salaries To, Rent
To, Depreciation on plant To, Loss on sale of furniture
To, Goodwill written off To, Net Profit
20000 5000 5000 30000
1000 1000 1000 500 1000 5500
By, Sales
By, Gross profit b/d
By, Profit on sale of building Book value 10000 Sold for 15000
30000
30000 5000
5000
10000 10000
Sol: 1. Calculate fund from operation
2. Adjustments in fund amt to find out cash from operation
Fund from operation:
Net profit 5500
Add: Items that do not decrease the fund: Depreciation 1000
Loss on sale of furniture 500
Goodwill written off 1000 2500
8000
Less: Items which do not increase the fund: Profit on sale of building 5000
Fund from operation 3000
(Out of Net profit of Rs 5500, Fund from operation is only Rs. 3000)
Cash from operation:
Fund from operation as calculated 3000
Less: Increase in CA and decrease in CL:
Increase in stock (12000- 10000) 2000 Increase in debtors (20000- 15000) 5000 Increase in BR (8000- 5000) 3000
Decrease in BP (4000- 2000) 2000 (12000)
( 9000)
Add: Decrease in CL and increase in CA:
Decrease in prepaid expenses (1000-500) 500 Increase in O/S expenses (5000- 3000) 2000
Increase in creditors (7500- 5000) 2500 5000
Cash from operation (4000)
Format of Cash Flow Statement
Balance as on ….. Cash balance ----
Bank balance ----
Add: Sources of cash:
Issue of shares ---
Long term loans ---
Sale of fixed assets ---
Short term borrowings ---
Cash from operation ---
Total cash available (1)
Less: Application of cash:
Redemption of Preference shares ---
Redemption of long term loans ---
Purchase of fixed assets ---
Decrease in deferred payment liability ---
Cash outflow from operation ---
Tax paid ---
Dividend paid ---
Decrease in unsecured loans, deposits..
---
Total cash application (2)
Closing cash balance = (1) – (2)
xxx
xxx xxxx
xxx xxxx
Importance of cash flow analysis:
Importance of cash flow analysis:
Helps in an efficient cash management
Helps in internal financial management
Discloses the movement of cash
Discloses success or failure of cash
planning
Limitations of Cash flow analysis Limitations of Cash flow analysis
Cash flow statement can not be equated with the income statement.
The cash balance by CFS may not represent the real liquid position of the business
Cash flow statement can not replace the income statement or the fund flow statement.
Difference between CFS and FFS:
Cash Flow Analysis Fund Flow Analysis
• It is concerned only with change in cash position
• Records only cash receipts and disbursements and thus can’t show the short term solvency of the business
• More useful in very short period for financial analysis
• Cash is a part of working capital and therefore improvement of cash position results in
improvement in fund position
• Decrease in current assets and increase in current liability =
Increase in cash position and vice versa
• Concerned with change in working capital (which includes cash)
position
• It shows the short term solvency of the business as it takes into a/c other liquid assets as well.
• Useful for short period as a tool for financial analysis
• Reverse is not necessarily true, i.e., sound cash position = sound fund
position
Sound cash position =/≠ sound fund position
• Decrease in current assets and increase in current liability =
Decrease in working capital and vice versa
